Germany Moves from Atoms to Photons

Germany has adopted a seemingly contradictory set of policies in its effort to reduce carbon dioxide emissions and increase energy security. While it has greatly emphasized renewable energy, the government remains committed to a phase-out of nuclear power and to the construction of new gas pipelines from Russia.

Germany's support for renewables has paid off. The country surpassed Japan in 2005 as the world's leading producer of photovoltaic panels, and it dominates the world market for wind turbines. Germany has also had success exporting its energy policy, specifically the feed-in-tariff (FIT). This system of government-mandated rates that electric utilities must pay to renewable electricity producers has been adopted in at least 37 countries. FIT is often hailed as a means to kick-start the transition away from fossil fuel electricity generation.

The German iteration of the feed-in tariff, in place since 2000, guarantees electricity rates for producers of renewable energy. The long-term certainty of a revenue stream—up to 20 years—provides producers, installers, and investors with income sufficient to recoup their outlay and earn a return.

The predictability and inviolability of the FIT makes for stark contrast with the Production Tax Credit (PTC) granted to American producers of renewable energy. In place in various guises since 1992, the PTC has required renewal seven times. It has been allowed to expire on three occasions, and at other times renewal came only at the eleventh hour.

The October 2008 renewal of the PTC extended tax credits to new wind power plants only until the end of next year. Given that most wind projects take two years from financing to launch, a one-year extension benefits only those companies that have already ordered equipment and are ready to install it.

Countries such as Spain or Denmark, with their consistent pro-renewables policies and predictable long-term revenues through feed-in tariffs, are a much safer bet for investors.

What continues to set Germany apart from the rest, however, is its dogged pursuit of a full phase-out of nuclear power.

History and Politics

In the late 1990s, with memories of Chernobyl still fresh, the German anti-nuclear movement made a compelling case for the phase-out, strengthened by the Green Party's role as junior partner in the government. The New Atomic Energy Act, in force since 2002, was part of the coalition agreement between Gerhard Schroder's Social Democratic Party and the Green Party of Joschka Fischer. The law bans the construction of any new nuclear power plants, and mandates their total phase-out by 2021. Some reactors will be shut down long before their operating licenses expire, at an economic loss of billions of dollars.

Today, as issues relating to energy security begin to grab the headlines, the phase-out policy begins to look like economic suicide. At the same time, Germany's other traditional fuel, coal, has become a dirty word due to its high carbon content. Together this amounts to a wholesale shift toward renewables and away from what used to constitute 80 percent of German electricity generation (coal and nuclear combined).

Electricity costs are therefore rising and are expected to rise ever higher as demand starts to outpace supply, the result being increased reliance on natural gas imports. Cynics see one big winner in all this—the former chancellor who presided over the adoption of the phase-out law, Gerhard Schroder, is now chairman of the consortium that is building the Nord Stream undersea gas pipeline from Russia to Germany.

The Green Party nevertheless remains popular, as do its anti-nuclear and pro-renewables policies. Striking while the iron was hot, the government pushed through aggressive goals for renewable electricity generation and ambitious cuts in CO2 emissions. In time, as the full impact of the feed-in-tariff begins to bite into residential utility bills, voters may have a change of heart about their willingness to sponsor the adoption of new technologies.

Until then, the renewables sector will continue to build momentum and bolster its global leadership credentials. Economies of scale are also kicking in, bringing about lower prices and strengthening the competitiveness of the German wind and solar industry. Should domestic demand eventually plateau or fall, German companies would likely find ready export markets.

The Sunny Side

The impending phase-out of nuclear energy has lit a fire under the alternatives sector. In a short period of time Germany has developed a lead in renewable energy generation and efficiency few can hope to match. In 2007, a year of robust economic growth, Germany's total energy consumption declined by 5.6 percent, according to BP Statistical Review 2008, even as production of energy generated with renewable sources increased by 13 percent. Clearly more is going on than meets the eye.

German Chancellor Angela Merkel's reluctant reaffirmation of the New Atomic Energy Act after her 2006 electoral win indicates a willingness, in the face of political pressure, to solidify Germany's role as a 21st century economic powerhouse—in every sense of the word. Already the manufacturer of one out of every three wind turbines and solar panels in the world, the country is on course to becoming the global leader in next-generation off-shore wind turbines and thin-film solar panels.

The United States has ceded a lead in this market in the absence of a coherent policy, and American manufacturers have lost their edge—even on their home turf. German photovoltaic manufacturer Q-Cells is on the verge of becoming a significant supplier to the North American market once its new thin-film plant goes online in Mexicali. A technology first mastered by Bell Labs and applied on U.S. satellites will end up contributing to America's trade deficit.

Nor are other countries standing still. Recognizing the potential for renewables to supplement coal-fired generating capacity, China adopted a feed-in-tariff [opens Word doc] in January 2006 and is now on track to surpass Germany as the largest renewables market by the end of 2009. Companies from other countries with FITs—Denmark, India, Italy, and Spain—are also leaving their American competitors behind.

What of Energy Security?

With these advances Germany has also received harsh criticism from the security community. As if on cue, recent muscle flexing by the Russian Federation has reminded many Germans, and their European compatriots, of their vulnerability to politically motivated disruptions in the energy supply. The International Energy Agency has also appealed to Berlin to reconsider the nuclear phase-out.

Russia's invasion of Georgia signals to the European Union that it must carefully "consider how it proceeds with the Partnership and Cooperation Agreement," said David Miliband, Britain's top diplomat. Summing up the EU's anxieties about overdependence on Russian gas, he added that "the need for a common energy policy I think is strengthened as a result of these events that we have seen."

In Moscow the notion of energy security takes on a different meaning. A Russian trade representative, when asked about the reliability of Gazprom's supply, pointed out a lack of corresponding security of demand. "Last year German gas demand decreased," the official said, "[while] we are asked to increase investment upstream."

The future of the German nuclear industry, meanwhile, is not a fait accompli. German attitudes are slowly changing. In Berlin, funding has been made available for the training of a new generation of nuclear scientists, earmarked for research into storage and security issues, and a panel of experts has questioned the phase-out schedule, recommending extension of nuclear power plant operating licenses.

Meanwhile the nuclear industry pushes on. Areva NP continues work in China, honing its skills and maintaining capacity while German policy is in flux. Its design for the European Pressurized Water Reactor (EPR) is also licensed, or in the process of being licensed, in Finland, France, the United Kingdom, and the United States. Should the German political climate change, Areva and its peers will be ready.

First Among Equals

Predictions that Germany will be left dangling in the wind once its nuclear power plants are shut down may therefore be premature. The pro-renewables policy has thus far been a success, and has pushed Germany to the top of the league in carbon-free energy.

"Whichever countries move first in the direction of green technology will be the rising powers of the 21st century" said Michael T. Klare, author of Rising Powers, Shrinking Planet: The New Geopolitics of Energy, in a recent conversation with Policy Innovations. Alluding to the United States, he added that "those who fail will march into decline."

The "Green Calculus" currently applied in Germany has produced a policy that will result in fewer carbon emissions, more energy self-sufficiency, and more than 250,000 jobs in a brand new industry. The country has also managed to decrease its fuel import bill.

Meanwhile, 2021 is still far enough away to reverse the anti-nuclear policy, allowing Germany to reassert its leadership role in this sector as well. The potential losers? Quite possibly the investors who have committed to the escalating construction costs of the Nord Stream pipeline. It is little wonder that they have hedged their bets with a planned spur to the United Kingdom.

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